RBA leaves rates on hold - but for how long?

“There was a strong impetus for the RBA to begin increasing interest rates before the end of the year,” said the UNSW Business School’s Professor James Morley, who sits on the Shadow RBA Board.

The Reserve Bank of Australia met today to decide on interest rates, and left the cash rate on hold at 2.5 per cent, where it has been for the past 13 months - one of the longest periods of rates stability since 1990. RBA governor Glenn Stevens ended his decision statement by referring to "a period of stability in interest rates".

James Morley is a Professor of Economics and Associate Dean (Research) at UNSW Business School. He said “the forecast for the Australian economy is mixed. The collapse of the iron ore price and a much weaker outlook for China is certainly drag on the Australian economy.”

Many analysts have been looking for any language in the RBA’s statement that could signal the start of a rate rise next year, in the light of a hot housing sector, and the fall in the dollar.

“The lower Australian dollar and a more robust recovery in the United States could help offset some of the weakness in the export sector,” he said.

The Australia Dollar has fallen markedly over the past few weeks, losing eight percent of its value against the US dollar. At the weekend it was at 86.4 US cents, its lowest since July 2010, and fell again after the RBA announcement today.“On the domestically front, it does appear that negative short-term real interest rates - comparing rates with inflation - have fuelled excessive growth in residential and commercial real estate prices. Inflation is also running at the top end of the RBA’s target range. Therefore I would urge the Reserve Bank to begin a tightening cycle soon, especially since the large increase in the unemployment rate in July has been reversed - from 6.4% to 6.1%.”

On Thursday there will be fresh unemployment data from the ABS.

“The main risk to the domestic outlook remains over exactly how contractionary an implemented budget will turn out to be,” he said. “On balance the RBA should start to increase interest rates before the end of the year, especially if the housing market continues to overheat and in the absence of a more sustained large upward movement in the unemployment rate.”